The Hartford Financial Services Group, Inc. — FY2017 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2017. The Hartford provides U.S. property and casualty insurance, group benefits, and mutual fund and exchange-traded product services. Principal reporting segments are Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Mutual Funds, and Corporate.
In December 2017, the company agreed to sell its life and annuity run-off business. That business was classified as held for sale, with results presented as discontinued operations. The company also completed the acquisition of Aetna’s U.S. group life and disability business on November 1, 2017.
Key financial metrics
| Metric | 2017 | 2016 | Change or comment |
|---|---|---|---|
| Total revenues | $16,974 million | $16,107 million | Increased 5% |
| Income from continuing operations before tax | $723 million | $447 million | Increased $276 million |
| Income from continuing operations, net of tax | $(262) million | $613 million | 2017 included significant tax and pension charges |
| Discontinued operations, net of tax | $(2,869) million | $283 million | Primarily the estimated loss on sale of the life and annuity business |
| Net income | $(3,131) million | $896 million | Basic and diluted EPS of $(8.61) |
| Core earnings | $1,014 million | $912 million | Non-GAAP measure |
| Net cash from operating activities | $2,186 million | $2,066 million | Increased $120 million |
| Total assets | $225,260 million | $224,576 million | Included $164,936 million of assets held for sale |
| Stockholders’ equity | $13,494 million | $16,903 million | Decreased 20% |
| Total debt | $4,998 million | $4,909 million | Debt-to-equity increased to 37% from 29% |
| Cash dividends declared per share | $0.94 | $0.86 | Quarterly dividend was raised to $0.25 in Q4 |
Earned premiums increased to $14,141 million from $13,697 million. Fee income increased to $980 million, while net investment income increased 2% to $1,603 million. Net realized capital gains were $165 million compared with a $110 million loss in 2016. The after-tax investment yield was 3.0%.
Property and casualty written premiums decreased slightly overall, reflecting 3% growth in Commercial Lines and a 7% decline in Personal Lines. The consolidated P&C combined ratio was 100.0, compared with 100.1 in 2016. Catastrophe losses increased to $836 million from $416 million, primarily from Hurricanes Harvey and Irma, California wildfires, and wind and hail events. Prior-year reserve development improved to $41 million of favorable development from $457 million of unfavorable development in 2016.
Commercial Lines net income was $865 million, compared with $994 million. Its combined ratio increased to 97.3 from 92.8. Personal Lines reported a $9 million net loss, unchanged from 2016; its combined ratio improved to 104.2 from 104.8. Group Benefits net income increased to $294 million from $230 million, including two months of Aetna business. Mutual Funds net income increased to $106 million from $78 million, while total segment assets under management increased to $115.4 billion from $97.5 billion.
Material changes versus the prior comparable period
- The pending life and annuity sale produced an estimated $3.3 billion loss on sale and drove the company’s consolidated net loss.
- The Tax Cuts and Jobs Act generated an $877 million income tax charge, primarily from revaluing deferred tax assets at the lower 21% federal corporate tax rate.
- A $750 million pre-tax, $488 million after-tax pension settlement charge followed the purchase of a group annuity contract covering approximately $1.6 billion of pension obligations.
- The Aetna group life and disability acquisition added $1.452 billion of consideration, $723 million of goodwill, and $629 million of identifiable intangible assets. The acquired business contributed $370 million of revenue and a $37 million net loss for the two months after acquisition.
- The company paid $1.423 billion for businesses acquired, principally Aetna, and received $222 million of net proceeds from the U.K. property and casualty run-off sale.
- The company repurchased 20.2 million common shares for $1.028 billion before suspending repurchases in October. Management did not expect to authorize a 2018 repurchase plan.
- Accumulated other comprehensive income improved to $663 million from $(337) million, primarily because of higher unrealized investment gains and pension-related changes.
Guidance, outlook, commentary, risks, and unusual items
For 2018, management expected Commercial Lines written premiums to increase and its combined ratio to be approximately 93.0–95.5, compared with 97.3 in 2017. Personal Lines written premiums were expected to decline by a low-single-digit percentage, with a combined ratio of approximately 96.0–98.0, compared with 104.2. Group Benefits expected net income of $275–$295 million, significant premium growth from the Aetna acquisition, and a slightly lower core earnings margin than the 5.8% reported in 2017. Mutual Funds expected higher assets under management and earnings if markets continued to appreciate and net flows remained positive.
The life and annuity transaction was expected to close by June 30, 2018, subject to regulatory approval and other closing conditions. The company expected approximately $1.5 billion of net sale proceeds, a 9.7% retained ownership interest valued at $164 million, and approximately $700 million of retained tax benefits. Failure or delay of the transaction would leave the company exposed to the run-off business and its market, reserve, capital, and policyholder risks.
Asbestos and environmental net reserves were $1.452 billion, including $1.215 billion of asbestos and $237 million of environmental reserves. The NICO adverse development cover provides up to $1.5 billion of protection above the December 31, 2016 net reserves; $285 million had been ceded under the cover by year-end 2017. Amounts beyond the treaty limit, or collectibility problems, could materially affect earnings and liquidity.
Other significant risks include catastrophe losses, adverse reserve development, inflation and medical-cost trends, interest-rate and credit-spread changes, investment valuation, reinsurer and derivative-counterparty defaults, rating downgrades, regulatory restrictions on subsidiary dividends, cyber and operational failures, competitive pricing pressure, and litigation. The Mutual Funds litigation resulted in judgment for the company in February 2017, but plaintiffs appealed; the possible loss could not be reasonably estimated.
Liquidity appeared adequate for anticipated needs. At year-end, the holding company had approximately $1.1 billion of cash and liquid investments, no commercial paper outstanding, and no borrowings under its $1 billion revolving credit facility. Near-term requirements included $320 million of debt maturing in March 2018, a planned $500 million junior subordinated debt call in June 2018, approximately $295 million of debt interest, and approximately $362 million of common dividends.
Most important facts for investors to verify
- Whether the life and annuity run-off sale closed on the expected terms and how the final loss, retained tax benefits, AOCI transfer, and retained equity interest affected shareholders’ equity.
- Whether Commercial Lines and Personal Lines achieved the stated 2018 combined-ratio ranges and whether catastrophe losses normalized.
- The integration, profitability, capital requirements, and dividend capacity of the acquired Aetna group benefits business.
- Subsequent asbestos and environmental reserve development, NICO recoveries, and remaining adverse development cover capacity.
- Changes in deferred tax asset realization, AMT credit recoveries, and the eventual effects of the Tax Cuts and Jobs Act.
- Holding-company liquidity, debt maturities, the planned junior subordinated debt call, subsidiary dividend approvals, and any resumption of share repurchases.
- Mutual Funds assets under management, net flows, fee margins, and sensitivity to equity-market performance.
- Effects of new accounting standards adopted in 2018, especially equity-security fair-value changes, stranded tax effects, and revenue presentation.